I don’t think I will shock any of you by saying that the strength of Fidelity’s UK fund performance has been below the standard that one expects from such a well known institution, Anthony Bolton apart.
Its UK growth fund has been poor for as long as I can remember. The UK aggressive fund was fine under Sanjeev Shah’s stewardship but performance has drifted off since he took on bigger mandates.
I have met many of Fidelity’s UK managers over the years and, with the exception of Bolton and Shah, I have always been left somewhat unexcited. It was rather like an episode of The Stepford Wives, where the managers’ wings had been clipped and they did not seem capable of free and original thinking.
That is why I was pleasantly surprised after meeting Tom Ewing and Aruna Karunathilake. They have been the new managers of the UK growth and UK aggressive funds since December 3, 2007. They impressed me.
Both have had about eight years at Fidelity and have held a numberof posts. Ewing has beena pharmaceuticals and biotech analyst while Karunathilake previously looked at construction materials, real estate and telecom equipment.
Ewing believes that “outperformance demands original thinking”, so his focus is on areas where he believes he has an edge on the market. For example, he has been underweight in banks because he does not believe he can add any value. He also has no exposure to Tesco because he feels that its non-food revenue is likely to come under pressure, as in other areas of the high street.
He is happy to pay an above-market multiple for shares where he feels the growth opportunities have been underestimated but this must be supported by the ability to meet short-term consensus expectations and solid balance sheets.
Currently, he believes his portfolio is trading on an average premium of 30 per cent to the market.
In terms of sell discipline, an important but often overlooked area of fund management, he will exit stocks if he finds a better idea, the theme has played out, the theme has been competed away or earnings have disappointed.
The UK growth portfolio is much tighter under his stewardship and the number of stocks has gone from 80 to 50. Note that he is index-unconstrained and size-agnostic.
Over on UK aggressive, Karunathilake looks at five key issues, both for buy and sell signals. These are the fundamentals, valuation, sentiment, technicals and change.
He uses a macro tilt to his stock bets, which encompass thematic influences. Right now, China and the internet are his two favoured themes.
The number of stocks will be around 35 to 55 and the fund has a go-anywhere approach. Active stock positions will be between 100 to 400 basis points, with an active sector bet capped at 500 basis points.
It is early days for these new fund managers but I was impressed with their enthusiasm, commitment and their ability to work together. It is clear thatthey share ideas and challenge each other.This is exactly what a more experienced team would do.
I certainly feel that they can talk the talk. Now they will have to prove that they can walk the walk.
I hope they can. It is crucial for the health of the industry that we have talented young managers coming through.
I am not quite ready to recommend these funds to clients but they are certainly ones I will be keeping a close watchon in future.
Mark Dampier is head of research at Hargreaves Lansdown